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Executives

Mary McGowan - IR

Harald Braun - President & CEO

Tom Cronan - SVP & CFO

Analysts

Steve Ferranti - Stephens Incorporated

Richard Valera - Needham & Company

Ilya Grozovsky - Morgan Joseph

Scott Searle - Merriman Curhan & Ford

James Faucette - Pacific Crest Securities

Larry Harris - CL King

Scott Searle - Merriman Curhan & Ford

Harris Stratex Networks, Inc. (HSTX) F2Q10 (Qtr End 12/31/09) Earnings Call February 3, 2010 4:30 PM ET

Operator

Welcome to the Aviat Networks conference call. Aviat Networks is formally known as Harris Stratex Networks. At this time, all participants are in a listen-only mode. Later we will open up the call for your questions. Instructions for Q&A will be provided at that time. As a reminder, this conference is being recorded for replay purposes. I would now turn the conference over to Mary McGowan of the Summit IR Group. Ms. McGowan, you may begin.

Mary McGowan

Thank you for joining us today to provide financial results for the second quarter of fiscal 2010 which ended January 1. On today's call will be Harald Braun, President and Chief Executive Officer; and Tom Cronan, Chief Financial Officer. During this conference call we may make forward-looking statements regarding our business including statements relating to projections of offerings and revenues, business drivers such as the transition to IP infrastructure, the timing and capabilities of new products and network expansion by mobile and private network operators.

These and other forward-looking statements involve assumptions, risks and uncertainties that could cause actual results to differ materially from those statements. For more information please see the press release and filings made by the company with the SEC. These can be found on the Investor Relations section of our company website which is www.aviatnetworks.com. And I would like to turn the call over to Harald Braun.

Harald Braun

Thank you, Mary and good afternoon, everyone. It is with a great sense of pride and commitment to the future that we move forward under the new corporate name Aviat Networks. The rebranding process began with the divestiture of Harris Corporation's ownership in May 2009 and our relaunch last week was an important milestone in satisfying our obligations to discontinue the use of Harris's license trademarks.

Early this afternoon we issued a press release describing our results for the second fiscal quarter of 2010. For those who have not yet had a chance to read the release let me provide you with a recap of our financial results and then I'll turn the call over to Tom for details on the quarter. In Q2 we achieved revenues of $123 million on a non-GAAP basis gross margin was 36%; net income was $800,000 or $0.01 per share.

By segment, North America revenue was $49.4 million and international revenue was $73.2 million. We ended the quarter with a strong cash position of $126 million and our book-to-bill ended the quarter above one. Highlights from the second quarter were as follows. We were selected for two significant new network build outs in India.

One was for WiMAX [rural] network deployment. The other was for wireless backhaul in a large mobile network rollout. We received our first WiMAX orders for Russia. We have received strong future potential for this technology. In Africa, Asia Pacific and North America there are encouraging improvements in customer spending, commitments and forecasts. And we saw an increase in value and bidding activities for mobile backhaul applications in comparison with prior quarters.

I will provide more color on our strategy and our markets later in my remarks. Now, let me turn over the call to Tom.

Tom Cronan

Thank you, Harald, and good afternoon, everyone. Let me start with the review of the GAAP financial performance of Aviat Networks for the quarter ending January 1, 2010. Second quarter revenue was $122.6 million, and we reported a net loss of $7.9 million or minus $0.13 per share. GAAP results included $7.3 million of pre-tax charges composed of the following.

$3.8 million for the amortization of purchased intangibles, $2 million of stock compensation and restructuring charges. And $1.5 million was for rebranding and expenses associated with transitioning from the Harris Corp's subsidiary to a standalone entity.

Now, I would like to present the details of the quarter based on the non-GAAP results. We believe the supplemental non-GAAP financial results reflect the basic operating results of the company and we will facilitate comparisons of our results across reporting periods. Please refer to our website for complete GAAP to non-GAAP reconciliation tables. Let me begin by saying that I am disappointed in the revenue growth this quarter.

Our booking and shipping activities were strong in the quarter, but we had a substantial increase in the amount of deferred revenue for product shipments. The good news is that we are increasing deferred revenue that will support revenue growth in future quarters. We have begun the analysis and work necessary to adopt the new accounting revenue standard and we expect upon adoption that the revenue results will more closely match our overall business activities. By segment, North America contributed $49.4 million of revenue in the second quarter, down 26% from the year ago period.

The split between mobile and private orders for North America in the quarter was approximately 40% mobile and 60% private. International segment contributed $73.2 million, 41% lower than the year ago period. By geography, Africa contributed $18.6 million in revenue, 64% lower than Q2 of fiscal year 2009. EMER which comprises Europe, the Middle East and Russia contributed $29.9 million in revenue, 39% less than the year-ago period.

Revenue for the rest of the world was $24.7 million, 5% greater than Q2 fiscal year 2009 period. Fiscal year 2009 the network operations segment was only 2% of annual revenue. Beginning with this first quarter of fiscal 2010 we eliminated the network operation segment as a separate reporting unit and consolidated the segment into the remaining two segments based on the location the revenue is recognized.

In the quarter, no customer contributed 10% or more to our revenue. Gross margin was 36.3% in the quarter, versus 27.9% in the year-ago period. The higher gross margins resulted from cost savings in the operations function as well as lower logistics expense and better supplier pricing on some projects.

As we also noted in the last conference call, there were higher than usual commission payments in this period which resulted in higher OpEx and higher margins. On a normalized basis the gross margin was within our stated goal of 32% to 33%.

We believe our margin is trending in the low 30s but there will be variability on a quarterly basis depending on the structure of the transactions, product mix and the completion of projects.

For the next two quarters we may also have some margin impact from the transition from manufacturing certain of our product lines in our own factory to an all contract manufacturing model.

Total operating expenses were $43.4 million or 35% of revenue. This amount includes $3.2 million in additional agent commission’s expenses as compared with Q1. When normalized for the additional agent commissions the OpEx was $40.2 million or essentially flat when compared with the prior quarter.

OpEx in Q2, 2009 was $41.7 million. For the prior year comparisons we need to note that OpEx in Q2, 2009 did not include any expense associated with the Telsima acquisition. The additional costs associated with the Telsima business unit in Q2, 2010 were approximately $4.3 million.

Again, in Q3, depending on the mix of projects and transactions that are recognized as revenue there may be commission charges that are classified as OpEx that will need to be recognized as expenses in the period.

Operating income was $1.1 million for the second quarter, compared with operating income of $11.5 million in the year ago period. Our pro forma tax rate remained at zero as we had a year-to-date break even net income.

Last year's tax rate for the quarter was 24%. Our cash tax rate is estimated to be about 2% for the full year. Employee head count was 1519 compared with 1531 employees in Q4. Now, we will move on to the balance sheet. Operating cash flow for the quarter was a negative $500,000.

Third party debt was unchanged at $10 million in the quarter. The cash balance on January 1, 2010 was $126.4 million compared with $133 million on October 3, 2009. The 500,000 in negative operating cash flow compares with $4.4 million in operating cash flow in Q1 2010.

Although we are disappointed with the negative cash flow the collections from the quarter from accounts receivable were again greater than the revenue recognized in the quarter. Accounts receivable increased from $114.3 million in Q1, 2010 to $133.3 million in Q2.

DSOs changed from 69 days in Q1 2010 to 91 days in Q2. The increase in DSOs is in part attributable to the amount of deferred revenue added to the receivables in the quarter but was not recognized as revenue in the quarter.

DSOs would have been approximately 80 days on a normalized basis. Depreciation and amortization of property, plant and equipment and capitalized software was $4.8 million. CapEx for the quarter including capitalized software was $6.1 million.

We continue our initiatives to decrease overall expenses and maintain the cash on our balance sheet. Now, I would like the turn the call back to Harald to provide you with the market and business update.

Harald Braun

Thank you, Tom. We do not see the full global economic rebound that would restore previous customer spending levels. However, we do see continued stabilization and some signs of improvement in most parts of the world. As I said last quarter, we need broader global economic stabilization to satisfy the demand that currently exists and to resume the revenue levels we have achieved in the past.

I would like now to provide a business review of the quarter with specific color on the regions we serve. Here I will also include some color for our long-term growth strategy that encompasses our IP mobile backhaul, our global network services and 4G WiMAX activities. In North America we continue to see signs of stabilization in the overall market and a number of positive indications that business is in fact trending up. Our meetings with key executives at various tier 1 mobile operators reinforce the fact that growing (inaudible) demands will drive a need for more microwave backhaul. We expect to see gradual spending increases in the text two quarters from at least one North American mobile network operator.

In addition in Q2, we completed our first shipments in support of a backhaul requirement for a major WiMAX build out. During the quarter we recognized revenue from a broad range of customers including federal, state and local government customers, both new and continuing. Our top customers included major carriers and OEM's in North America with new customers such as MTS Allstream in Canada being added. Our key differentiators in North America continue to be a breath of products and our ability to offer and to deliver on the supporting end to end key services.

Now let me provide a brief update on the U.S. stimulus program. Thus far the first awards came in mid December totaling around $550 million and will be spent on building broadband infrastructure using largely fiber base systems. More funds are expected to be released within the current quarter for both middle-mile and last-mile project with more closely fit to our solutions. We believe we have opportunities to participate in the stimulus programs with our WiMAX, IP backhaul and managed service portfolio and we will be competing for these system rollouts as the funding is released.

Additionally, we are currently working with customers in preparing their applications for the second round via our GO-StimuluS PrOGram. Our current focus is to help the ILEC, CLEC, wireless internet service providers and local government entities with the appropriate technical guidance as well as the application process. This service has proven to be of significant value for our customers.

The Africa region remains an area with substantial growth potential as the demand for new infrastructure continues. African networks build out are extremely dependent on direct foreign investment. Limit on available capital have slowed the growth of network infrastructure throughout the continent over the past few quarters. While we cannot say that the economic situation in this region has fully stabilized, we do now see a number of positive factors driving further or future opportunities. Our largest customer MTN is again expanding its infrastructure activities and we are happy to see continued business from them and to hear the optimistic outlook for renewed growth in Africa. We remain optimistic on the outlook in this region for several reasons.

Number one, Africa has strong end user demand for wireless communication services. Number two, we are seeing increased capacity demands as networks are deployed and subscribers are added. Number three, we have long-term customer relations and proven track records throughout the continent and the turn key solutions that are required to be successful on this continent. And number four, we continue to expand our regional footprint into parts of East and North Africa where we expect to see additional orders in the coming year.

For example, our most recent success in Somalia. Last week we announced an order for 100 high capacity Eclipse radios from Hormuud Telecom, the number one operator with over 1 million subscribers. Our commitment to state of the art telecommunication technology earned us customers' confidence and our role in their continued network deployment. We continue to see opportunities for WiMAX and for services related to our energy and security solutions. We are conducting trials with three customers in these areas, all of which provide promising opportunities once successfully completed.

Our turn key WiMAX rollout continues to generate interest as demand for broadband services increases. We are expecting to see further opportunities throughout Africa in the coming year. In our EMER region which comprises Europe, the Middle East and Russia, customer spending level remained much lower than in the past but there are encouraging signs of increased spend activities. Several European based mobile network operators have issued new tenders for future expansion requirements and migration to IP-based networks for which we are competing.

We have previously discussed a large network deployment for a customer in the Middle East. The design for this network has undergone significant changes and delayed the implementation. In Q2, we delivered additional links of microwave equipment for this project and we recorded our first product revenues. We expect the build out to start picking up pace and as additional shipments occur, we will recognize further revenues. The precise timing of this build out has not yet been determined and so the impact on revenue remains difficult to forecast. We do know that this contract will be a contributor to revenues in the upcoming quarters. In Russia, we had our first success with our WiMAX products along with an increased [improvisation] activities forwards the anticipated national 2.3 gigahertz spectrum option which is likely to roll out over the next two years.

The good news is that in Russia we are seeing renewed activities. In December, multi-based (inaudible) selected NetBoss and Eclipse for its new 3G network and our network management solution was also selected to manage the (inaudible) network in Lithuania. These wins were based on recognizing our breadth of technology and service solution. We continue to strengthen our market position in Asia-Pac region. Orders in Q2 were above plan and above 2009 levels.

We continue to support our key customers in India, Australia, the Philippines, Nepal and Bangladesh to name a few in the region. Our latest contract win was with Uninor, the joint venture of Telenor Group and India's Unitech Limited. This is a five year contract for backhaul and excess microwave links handling both TDM and IP requirement as well as maintenance services. This frame contract is a significant addition to our recent success in India.

Uninor is nationwide T1 carrier in India with licenses to operate 2G services across all 22 of the country's telecommunication regions. Uninor has already launched its services in eight telecom regions. We expect to start bookings and shipping in the second half of this fiscal year. We continue to see demand and opportunities expand in a number of Asia Pacific countries and Aviat Networks will be competing aggressively for their businesses.

I would like to spend a few moments now updating you on BSNL and the rule of two tender in India. In October, in partnership with Icom, Aviat Networks was awarded the level three position. First purchase orders are anticipated to arrive this quarter. As you will recall, this was the second BSNL tender we have won.

The urban one project in Southern India was awarded first and is undergoing network build out with first commercial services to be launched in the near future. In Q2 revenue from our WiMAX business unit more than doubled from Q1 basis largely growth in Asia Pacific. Granted, we are starting from a small base but we are seeing good direction. We expect to see even more significant revenue contributions in the second half of our current fiscal year as deployments pass the [final] stage.

On the technology front we continue to make solid progress against our new product road map. Our overriding product strategy for IP mobile backhaul remains focus on converging to a common IP based microwave platform. In Q2 we made customer shipments of the IIU 600 which is the latest generation of this platform and is initially targeted at North American customers for all indoor and high performance applications.

This is also our solution to upgrade and eventually replace our legacy North American products. The IIU 600 product passed the nets compliance testing required by certain tier one customers in the U.S. Selected versions of the product are also now US accepted.

We will continue to build on the success of our Eclipse product platform. The migration we offer from TDM to mixed TDM and IP to all IP continues to differentiate our solution. So proportion of IP enabled products as we are now supply in this segment continues to increase. In calendar year 2009, 45% of our backhaul product sales came from this category.

This is up from 28% when we started tracking these metrics in June 2008. Our 4G RAM solutions continue to rollout in line with our technology roadmap. We added frequency band variations of base stations and CPE as we seek to expand our geographic aggressive footprint. We were also granted FCC approval of WiMAX models for use in the 3.65 gigahertz frequency spectrum in North America and we see this playing a role in potential broadband stimulus funding applications.

Let me conclude my formal remarks with comments on guidance. In Q2 our book-to-bill was over one for the second consecutive quarter and we are looking to continue this trend. With respect to revenue for Q3, our outlook remains cautious as we enter what is a seasonally soft quarter for our company. Based on these expectations we are now guiding for the following, Q3 revenue in fiscal year 2010 to be in the range $120 million to $130 million, gross margin is expected to be in the low 30s as Tom stated earlier and total operations expenses in Q3 after normalizing for any agent commissions I expect it to be reduced quarter-over-quarter.

Before we go to Q&A, a comment on our company's new identity unveiled last week. The new brand represents a combination of the company's transformation over the past three years from that of a specialized microwave backhaul equipment supplier into a world class provider of advanced IP wireless network solutions with a comprehensive portfolio of migration solutions and life cycle services. At this point I would like to open the line for questions. Operator please poll for questions.

Question-and-Answer Session

Operator

Thank you sir we will now begin the question-and-answer session. (Operator Instructions) our first question from the stein of Steve Ferranti with Stephens Incorporated. Please go ahead.

Steve Ferranti - Stephens Incorporated

Tom, I wanted to follow up on a comment you made in your prepared remarks sounded like shipments were ahead of revenues for the quarter. Could you give us some sense of the order of magnitude of the delta there? And perhaps talk a little bit about some of the milestones that you face in terms of actually recognizing revenue associated with those shipments.

Tom Cronan

So, the addition to deferred revenue this quarter from sort of the nonstandard product shipments because we do have typical deferrals from our percentage of completion accounting and typical for service but on our typical shipments we had some additional revenue deferrals, within the high single digit millions of dollars and on a cumulative basis in the mid teens. So, you know, we are building up a reasonable amount of deferred revenue. And so you can see how that would have an impact on the overall view of the quarter depending on what revenue gets recognized and what gets deferred.

Steve Ferranti - Stephens Incorporated

And are these just standard customer acceptance milestones that we need to hit in order to recognize that deferred revenue?

Tom Cronan

Right, it has to do with our typical revenue recognition process going through all of the tests and looking at it against the contract and against the revenue recognition standards.

Steve Ferranti - Stephens Incorporated

Okay. Fair enough. And then it looks like as Harald, I think you allotted to that your Middle East and Russia was a positive geography for you guys in the quarter. And I think you mentioned you started recording revenue associated with the big mid-east project that you had. Can you give us a sense sort of geographically which of those three regions you saw the strength in, how much of that was associated with actually storing the record revenue on this mid-east project and thoughts on how that region looks going forward?

Harald Braun

I think first off I this think I'm very happy to see activities happening in the European region and of course, also in Russia as we add over the last three quarters all the time Russia and eastern Europe on the block here.

Furthermore, that is great and we see also some activities in Europe. They are really moving to IP platforms and we see spending happening right now there. So, this is greater of course, the first win in Russia with WiMAX it looks like that in Europe or in that region WiMAX is really the battleground for the future.

This comes more and more clear there and we see that on activities which we have with the customer there with High C level customers, the activities are picking up there so that is positive. And a tremendous amount of work went into the EMER region and of course recognizing revenue there and we will see that over the next couple of quarters and as I said in my prepared remarks.

That is positive. We have to time with the customers in shipments, right, we have to time it in a way that we can also recognize revenue and of course, the customer plays also a big role into that.

Significant amount of work with Tom's organization and also with the operational organization and I said as the customer goes into that that area. So, and over the next I would say two or three quarters we see there are significant revenues and I hope we can work it all the time out with customers.

Because it is such a huge project, you know, they have to come with the customer on their side they have to also deploy that right and this is not an easy task. So we have to time shipping and all that what we need to do for better recognition also with the deployment on the customer side.

Not an easy thing in the Middle East but we are happy to have the project and the fact is as I said that that whole thing is in deployment and we are happy to see that. And it's not only that project there are also some other projects with some Tier 1s in that region and particularly in Saudi Arabia where we see picking up on activities in deploying IP mobile backhaul.

Since they have a lot of end user devices and they wanted to connect, of course, also to the network. So this region is pleasing us, I have to say, in EMER. Tough in Europe, tough in Russia but we see signs of life there.

Steve Ferranti - Stephens Incorporated

And just to clarify, Harald, that particular project was somewhere north of $60 million in total opportunity size, is that still the case?

Harald Braun

Yeah, that is the range, yes. That is still the range. And a significant portion of that we shipped, but I think you got in the prepared remarks we could not take everything to revenue, right, so I think you got that. And this is disappointing but the rules are the rules and we play by the rules.

Steve Ferranti – Stephens Inc.

I understand. And then just last one from me. When you look at the March quarter, the guidance you provided, can you give us some sense of how much seasonality you have baked into your guidance and sort of how much of your guidance reflects still some uncertainty in the macro environment? Any color you can give around that would be helpful.

Harald Braun

Yeah, difficult to say. First off I would say what we just elaborated on; the timing of delivery of shipment with this customer in the Middle East is a significant portion. So we need to time that. That is something what we, therefore we have to arrange still. So this is difficult to predict. Some I would say single digit seasonality we have built in and as we see the regions going in the right direction. You see it on the bookings. I am happy about the bookings and which direction they go. So we have some very positive signs there but revenue recognition, some seasonality. That made us come up with the same guidance we did in the last quarter for this quarter. I hope that helps, Tom. Any additions to that?

Tom Cronan

The other thing that we continue to look at is some of the newer contracts in Asia Pacific. We have a great deal of lumpiness and depending on meeting the contract conditions much like the Middle East we'll have the release of revenues in quarters when we meet all the conditions in the revenue recognition test and knowing exactly when those will come to fruition makes us also give a range and so that's part of our thought process here as well.

Operator

Thank you. Our next question comes from [Joanna Machus] with (inaudible). Please go ahead.

Unidentified Analyst

So you saw some nice sequential growth in North America. Wondering, some comment on the general pipeline. You mentioned some WiMAX related deals, kind of what you are seeing going forward. And then secondly on the stimulus, obviously it is a little early to quantify the impact but can you talk about your expectations for timing and whether or not that could be in the current fiscal year and it sounds like September might be…

Harald Braun

Let me answer from the playbook again. So the playbook says that we can expect the 90% of the broadband funding for the first $7.2 billion here in this month, in the February month. And when you see the playbook from the administration, you need to start then also in this year or up to September. That means hopefully they stick to the rules and hopefully they stick to the timeline to first award the customers the rest, the 90%, the rest of the stimulus money and then also the customers need to be very, very active and very, very, fast in starting deploying before September otherwise they lose the money.

So if they stick to that plan, we expect actually something significant in this on our fiscal year and of course also in this calendar year. So, that is the playbook. Do they stick to the timeline? We all hope and as we said before, we built that as an opportunity and an upside into our plan, right. So we don't have a lot of indication. The only indication we have is which customers actually did we help. And the other indication is that they are asking for the areas of WiMAX, IP mobile backhaul and services and that is very encouraging actually and now we have to see what money they really get from the administration and then of course see that we help them build out it. So it's very, very difficult to [prognos] but we see the build out in our fiscal year but also in the calendar year when they play still by the timeline.

Unidentified Analyst

Gr8. And could you comment maybe on to what extent you think services and how important services will be in a lot of these build outs because obviously that's a key competitive differentiator that you have.

Harald Braun

Absolutely, correct. Absolutely correct. A very, very key role and we increased our focus also on that as we did already with Open Range. You recall Open Range with the network services and the network operation center. But building the services have our feet on the street as we got to a market leader position here with end to end turnkey solution in North America. I think this will be the key for the ILEC and the CLEC centers, the small wireless service provider. Absolutely key. You are absolutely correct.

Operator

The next question from Richard Valera with Needham & Company.

Richard Valera - Needham & Company

Harald, a quarter ago you laid out some fairly specific opportunities. I guess a lot in the Asia-Pac region that you thought would drive sequential revenue growth in the March and June quarters and here we are now and we're guiding sequentially flat. Can you talk about what is different than a quarter ago? Has anything underperformed to your expectations? Is this purely a rev-rec issue? Why aren't we seeing sequential revenue growth when you've had some positive book to bill? You've had some deferred revenue. Any color would be helpful.

Harald Braun

Thanks very much for that question. So first off, the bookings are there. So, what I laid out and which customers we won and the bookings are there, very positive. We are on the right train they are over performing. They get better than the quarters in last two quarters, better than the year planned in the Asia Pac. We have the right customer, we put Uninor on there, we put the second BSNL on there, smaller ones, everything what you just said is absolutely, correct to see it in bookings.

The biggest thing is the revenue recognition. And now we are going also from the new recognition all those things. Tom said in his prepared remarks that we are now going to the new revenue recognition roles and we will be the early adopters of those and there are question marks of this recognition rules. So it's more revenue recognition, you got it; you nailed it, than bookings. We got the contracts, we got the bookings. We need to turn it now to revenue and playing by the rules. That's what it is. And, of course, for us, you know, doing everything, it is somehow disappointing to see those rules apply and then you cannot take this or that and suddenly you are in the midrange, right, of the revenue rather than you know what the upper range, right, or even beating it, right? Very volatile this situation.

Richard Valera - Needham & Company

How about WiMAX, you mentioned last quarter you thought that could be 10% of revenue for the year with a strong ramp in the back half. Do you still think that's likely?

Harald Braun

Yes. Yes. We are on track on that. We are on track on that and I mean a major thing was the opportunity with the BSNL Level three award, right. That was a major one where we beat actually established WiMAX vendors. That was a big one. And it looks now that we are proceeding there. And at the moment, actually the deployment happens at the moment for the first build out in Kerala, you remember when we do that, the build out of the shipments took place, the build out is taking place and so we are on track on the 10%.

Richard Valera - Needham & Company

Okay. And finally on the gross margin, Tom, you mentioned gross margin would have been 32% to 33% this quarter X the commission situation. Is that the level we should look for going into the March quarter or might it be lower because of these manufacturing shift issues as you mentioned?

Tom Cronan

Yes, so I think we have a little bit of variability there but our general target is in that range and there is an opportunity to certainly keep it in that range but there could be some surprises as we go through this transition and I just wanted to give sort of a head's up in case that happened. Certainly our plan is to continue to be in this range. And if there was some variability it would only be for a quarter or two and then it would come back. So, we are expecting it post the transition to actually go back to go to the mid-30s as always has been our sort of stated goal once we are through this transition.

Operator

Thank you. Our next question from the line of Ilya Grozovsky with Morgan Joseph. Please go ahead.

Ilya Grozovsky - Morgan Joseph

Hi, thanks. I just have two questions. On the expense side, how much more do you think you can ring out of the operating expenses? You guys have done a reasonable job and just kind of I want to understand, I know it picked up this quarter on SG&A but when we resume that trend what do you think it comes down to?

Tom Cronan

We have take and series of actions already in January that should result in some savings in this Q3 and I think, you know, this quarter we are thinking another, 5% reduction in the OpEx and potentially continuing some further reductions to the rest of the year depending exactly on how the revenue rolls out. So, we are continuing to reduce OpEx so we going to continue to focus on that and we will continue to do that until we see a substantial change in the top line.

Ilya Grozovsky - Morgan Joseph

Okay, great. And then also, had you been able to recognize all of the revenue of the product that you shipped this quarter, what would revenues have looked like this quarter?

Tom Cronan

Well, I think as Harald said, we probably would have still been in the range but we would have been much higher portion of the range here. And so, as we try and range these things it was a good range to pick because we still would have been in the range but we would have been in a portion of the range that I think most of you would have been much happier with us.

Operator

Thank you. Our next question comes from the line of (inaudible) with Aviat securities. Please go ahead.

Unidentified Analyst

I want to drill down a little further into the incremental there. Tom, Harald when you looked at the plan for the December quarter versus the September quarter. Where did you come up short? Is it entirely on the deferred revenue and within that is it primarily related to the Middle Eastern contract. Because I know in private conversations you thought that the Middle East customer could have been a 10% customer this quarter, obviously that didn't pan out. Is that really the delta here?

Harald Braun

Let me start with it and I give also some more color on it. This is a very good question to make that clearer. Yes, yes, and, yes. So it is in the Middle East we would have been much higher there as Tom and I alluded to earlier, right. And so that is a fact. So that nothing broke down, everything was in place as we calculated it except this portion of it and, of course, that has also an EPS impact and so on and so forth.

And I would say also it would have been a 10% customer if we would calculate the whole string of when we say that is one project it would have been a 10% customer.

But there is one project but with a sequence and some third-party, some sub-contractors which we are splitting up, we have to split up that project in a couple of sub-contractors so and we cannot put that in as one project because there are two or three names in there where they get different revenue portions.

If we would put everything together and add everything together it would have been a 10% customer in the Middle East, right. I think that is very clear. So thanks very much for clarifying that but we cannot do that because there are three or four different names associated with that.

Tom Cronan

Just to clarify that if we looked at end user customer basis and not our direct customers who are the integrators and distributors it would have been a 10% this quarter. So it was still a significant transaction in the quarter but as Harald said, it was the difference on the revenue distribution between what our expectations were and where we ended up.

Unidentified Analyst

So if we were previously thinking this is a $60 million plus deal that will be recognized let's call the December quarter and then with the subsequent amount over the next three to four quarters or perhaps a little more elongated here, is that how we should be thinking about this?

Tom Cronan

I think it is still two to three quarters before we complete the project and the initial amounts we had been talking about.

Unidentified Analyst

Terrific and drilling down a little bit on the one region that was obviously weak this quarter was Africa. What transpired there between MTN, and can you just talk about the trends there?

Herald Braun

The trends in some areas are picking up. So we need to see a little shift there. It looks like that our best region there, Nigeria, is picking up again. So, but new regions coming into play. Now, we see also some first movements there in North Africa where we opened an office, remember that, a half year ago, seven, eight months ago. So there are things picking up but excess to capital, you know, really to give us the big project or giving also other companies the big projects again is an issue.

Asking for financing is an increasing demand there and a requirement actually so we had some significant discussion with one of our best customer there and this project is not awarded to anybody yet, you know, on financing and how we make sure we can finance it.

It is all about how do, we get the money to make significant network rollouts what we see and I think you see it in the market data you see it in the news, you see it everywhere, the demand of subscribers, of mobile subscribers is huge. And they are connecting all to the broadband network and there is everywhere there are crunches and bottleneck.

So it is there, the demand is there, but building out networks our capital is intensive and that is what it is. Access to capital. What we see in some areas where we are active relaxations and stabilizing and I guess we need another one or two quarters to get these guys back on the original track.

Tom Cronan

And I would just add that the bookings trend within the quarter for Africa was very different than the revenue trend within the quarter for Africa. So, it was a much downward revenue trend but we did see an uptick in the orders within the quarter.

Harald Braun

That is a very good point. Because when you see that, right, we were very happy to see measure the bookings from the last quarter to this quarter totally different picture. So, as Rich said also earlier, the indications are there no big mistakes everything what we counted on in terms of customer wins and what we want to establish were all there. Very happy about that booking trends are there, everything is there but on the revenue recognition side I think, yeah, I think we commented enough on it, yeah?

Unidentified Analyst

And turning to the BSNL line I think we previously talked about them kicking in, in the March quarter and perhaps being a 10% customer. Is that still the thinking?

Harald Braun

Yeah, it is still the thinking. I think Tom gave also some new color on that one. But here again, this is a WiMAX build out. This is acceptance, a huge project, a big project for a couple of suppliers and vendors. Here again we are going to be changing to the new revenue recognition roles, right, we need to understand that and we need to understand what impact that has.

That is what we have to study together with all our auditors and this is something what we have to take a look at going forward. We know their deployment plans and we know the shipping plans on our side. And so that looks all positive, right. We know also that in the near future, I think I said near future and watch out in the press for that, I think they are planning a big press event. The role on Kerala region is going to go big on the announcement of launching their services.

So everything in place, intentions are there, shipments are there, build outs are there, everything in place. And we are on track with that what we planned. Tom is that fair?

Tom Cronan

Yeah, I think as we have talked about it on these initial contracts where we have customer acceptance, the timing of that acceptance is difficult to judge and the revenue is almost entirely dependent on that acceptance.

When we get the acceptance we will be able to take a significant portion of the revenue within that quarter. So that is what affects our visibility and we're working hard obviously to keep it on track from a timing standpoint as we had discussed.

Unidentified Analyst

Got you. And just one more from me. Harald, can you give us a little more color on the Uninor win, obviously a nice win and you talked about revenue recognition perhaps kicking in, in the back half of the fiscal year. Can you size that opportunity perhaps relative to either the Middle East contract where the BSNL rollout or urban tenders to give us a sense of what the opportunity is there?

Harald Braun

So, first of all, you are right. It is a huge opportunity. It is a tier 1 vendor acting all over India. Very happy to have won that account. And of course, this is a consortium off Scandinavians and India. So we're very happy to see that and of course on the infrastructure side, I think they announced also their winners. So we are in a very elite group of people there to have won that project on the infrastructure side and microwave side. So that is very nice. And on the revenue recognize side I think it's more related to our additional bread and butter business. So maybe it is not that difficult on the revenue recognition side than other projects but again, we need to time shipping and deployments and acceptance and all these kind of things which we discussed earlier.

So, there is a first build out. We are expecting orders very soon because we are on a very, very hard and strict timelines. We are the only ones at the moment who are getting orders. So that's what we're feeling. And the range, as I said, this is a five year contract. We are anticipating the first contracts with a couple of hundred links. I cannot tell you the real number here because as I said, it is a five year contract. We are planning it right now. So when I have more specific numbers in terms of what are we spending in the first in this calendar year 2010, I will break it down and I will give color on that. We have an initial request from them for excess and trunking and of course also services. But I would maybe tell you the wrong number right now because it is not hammered in stone.

Operator

The next question is from Scott Searle with Merriman Curhan & Ford.

Scott Searle - Merriman Curhan & Ford

Tom, just a clarification on the agent commissions. That figure was $2.3 million and I just want to make sure I understood the mechanics of that. That figure was basically reflected in SG&A as opposed to in your gross margins. Is that correct?

Tom Cronan

Scott, it was $3.2 million.

Scott Searle - Merriman Curhan & Ford

$3.2 million, okay.

Tom Cronan

And it was in SG&A and we priced the deal in a way where it would have been equivalent to say a distributor's share of the profits and therefore we see it as being a movement from what would have been in the lower margin to an OpEx change.

Operator

Thank you. Our next question comes from the line of James Faucette with Pacific Crest Securities. Please go ahead.

James Faucette - Pacific Crest Securities

I just had a couple of questions. First, I think you made it pretty clear that things business wise and order wise are developing pretty well as you had planned, maybe some revenue recognition issues. Cam you talk about where you are seeing maybe more opportunities than you had anticipated and where and when those might materialize. And the second question I have is just on competitive landscape. Can you talk a little bit about who you are running into or how you are faring against both stand alone microwave competitors as well as what the status is on the larger OEMs like Ericsson et cetera.

Harald Braun

Very good. I will give you some color on that. First I think the region and I think we mentioned it earlier already where we are positively surprised and we see really some real good actions in Asia Pacific and that is driven by India. But it is also Philippines. It is also renewed activities in Indonesia. We have at the moment our people in Australia. So we are positively surprised about the spending levels and activities there. And interestingly enough, in some of the countries now we see also that it goes from the mobile operators from the tier 1s into smaller ones but also in different categories and different verticals. Like we have in North America, like utility companies, state and local government business, large enterprises. So we see that happening now in Asia Pacific. So we need to be aware of that.

So that is definitely the region where we see the biggest growth potential and, of course, there is one leader there and that is India. As I said now again from zero almost spending nothing in the last couple of three, four quarters, I recall two activities where we see now talking to the C level that they are really encouraged and engaged again in discussions is actually in Russia and that's all driven by what we call 4G WiMAX radio access networks. So, very encouraging signs there and definitely in Europe IP transition is really picking up. So, I hope in the next two quarters to see their activities there and of course that drives also North America. But to answer your question very precisely, Asia-Pac, Asia-Pac, Asia-Pac. So let's put it that way. Competitive, we run into tier one operators mainly with the established big players.

The Ericssons, the Alcatels, the NECs, the Huaweis, they are all there. For example, on the Uninor side there were all there. Right. So and you maybe have seen a hookup infrastructure business and who they selected and so on and so forth. So, we are all the time in the lead group on this tier one operators to be a part of this and we have somehow to win against these players.

In Africa, you see more and more Huawei getting in and, of course, we mentioned that earlier, there are finance packages; there is barter trading going on. So, very difficult for us to compete, but we can compete on other levels. How to build out networks in Africa, how to do end-to-end solutions? How to beat them in services and delivery mechanisms, supply chain etcetera. So, there are mechanisms to beat them but we're running more and more into them and particularly in Africa. So that’s what we're seeing, so them meaning Huawei. So, but they are established players and then in North America there are some other players coming in and you have some smaller players there where the clear wire situation, we know that who is playing there and I think that will be also a significant player going forward and I'm 100% sure there will be other vendors getting into that network.

So, we see there are other players or smaller players competing. To see smaller players competing for the stimulus money here in North America. But in our projects where we are competing mainly on the tier one side, it is all the big three, four big vendors as I mentioned before. The Ericssons, Nokia, Siemens together with [Cellular One] in some cases and Alcatel and Huawei

Operator

Thank you, our next question comes from Larry Harris with CL King. Please go ahead.

Larry Harris - CL King

Yes, thank you. A question about India. One of the other WiMAX vendors and of course I understand you probably have the largest mark share in India. They discuss discussed on their conference call today licensing issues, spectrum issues and maybe it relates to when they can recognize revenues. But from are your perspective, there any licensing or spectrum issues with respect to WiMAX in India? Thank you.

Tom Cronan

From our perspective and how we compete with the licenses who got the licenses and who is building it out, I think I see no issue and so we are working via Icom, we have very close relationship there so you see that almost everybody actually in the L1 to L4, I think, everyone is working with somebody in India, right. So, whether an OEM partner there and a service partner. So for us it's cleared, we have no license issue. It is cleared, it is done, it is over with and we are deploying in the frequency they told us.

Actually, everything is pretty stable what I can see so far. Otherwise we couldn't have built a product and they couldn't deploy, right. And they are deploying right now. And I said in the near future please watch out what they do in terms of press announcement and do big ribbon cuttings there. This will come out. Otherwise there couldn't have been, if we would have had these issues it could not have been the employees. And the issue is also in India. There are only a few who have this license. You know that the 3G licenses are again postponed and that of course is BSNL's big, big play here that they want to do as soon as possible, as fast as possible, get deployments done in order to have an advantage over the 3G licenses build out. So, when you are part of it they make sure that the license and the frequencies is okay. So we have not seen these issues.

Larry Harris - CL King

Understood.

Operator

(Operator Instructions). Our next question is a follow-up question from the line of Scott Searle with Merriman Curhan &Ford.

Scott Searle - Merriman Curhan & Ford

Harald, a quick follow-up on India. The 3G licenses look like they're getting pushed a little bit. It sounds like that is not an issue with Uninor. But could you just briefly discuss how that impacts you and also did you put a dollar amount in terms of the amount of bids you are involved with for the US broadband stimulus plans?

Harald Braun

The second one is very difficult. Every number I tell you is wrong. So what we know? I don't know even when some customers are asking whatever; let's say for $500 million. Let's say for $50 million. And they get an award for whatever, $5 million or $10 million. They need to totally reconfigure the network. And so they ask for the sky but get something else, right? And that something else we don't know. So and then, of course, I cannot plan. So it is very, very difficult to plan that. And then, of course, the other big question is where we have some bets going on here what will be awarded towards wire line and wireless.

So that is the big question also. The administration awarding more wire line build out or a wireless build out? We believe and of course, it is our business very close to our vest, of course, we believe that in rural area the best solution to get broadband access is wireless. And so we have somehow calculations but I cannot give you a number because this would be really not prudent for me.

It would be definitely wrong. So let's wait for what the customers get and what they get to build out and then we sit together with them and help them build out for what money they get. So that is the situation right there.

3G licenses pushed out in India, yes, you are, correct. That is now I think the third or the fourth time. So later in 2010 means for me at the moment midyear, right. So I'm not sure that it will be done in the first quarter. Our intelligence says at the moment midyear. And, of course, that actually has a discussion point internally in our company because that is very important for not only the BSNL situation because you want it to roll out as much as possible WiMAX and other guys which touch on whatever holds their frequency spectrum it is also important for microwave. So because this 3G will drive demand and we would like to participate in the demand and it drives also heavily the Uninor situation so we are really anticipating here and we are looking very much forward to the 3G licenses and who gets them and of course, then to our advanced build out in that a area. So we are calculating there on more IP mobile backhaul build out and this Uninor we have a very good solid base to start and we are participating in a couple of other tenders I guess in the future.

Operator

Thank you. At this time there are no further questions. I would turn the call back to management for any closing remarks you may have. Please go ahead.

Mary McGowan

Thank you all for joining us on this call and webcast. Aviat Networks is planning to attend the Thomas Weisel partners conference on February 8, in San Francisco and the Jefferies Global Technologies conference March 10 in New York. We hope to see many of you at those events. Thank you and good day.

Operator

Thank you, this does conclude the Aviat Networks conference call. We thank you for your participation and you may now disconnect.

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